Saturday, September 6, 2008

Some Sound Advice

We hear so much bad advice - usually from those that stand to make a profit off an investors decision. So many decisions only help the advisor - not the investor. Just look to any reserve mortgage sight sponsored by a broker and it tells how wonderful the tool is - it is the right decision for you, it is the right decision for anyone - since the broker makes his commission in his position he is right.

With the complex investment world around us sometimes turning to a financial planner is a great idea. But how to make sure you are going to one that is looking out for your best interests, not theirs. Suze Orman provides an excellent guideline in this article titled How to find a financial planner. Suze provides five questions to use when selecting a Financial Planner. Lets take a look -

1. What's your background? Did he do the work to become a certified financial planner (CFP)? What other formal training does he have? And how long has he been in business -- 10 months or 10 years? Experience matters.

2. Do you recommend term life or cash value policies for most of your clients? You better hear "term." If someone starts extolling the virtues of cash value life insurance, you should stop the interview right there and politely leave.

3. Do you use index mutual funds and exchange-traded funds? You want to hear yes. He doesn't need to use index funds or ETFs exclusively, but you want to know that indexing is part of the mix. The bottom line is that very few actively managed mutual funds consistently beat the indexes. A big part of the reason is that good no-load index funds have super-low costs, and the less you spend on fees, the more you will have left in your account.

4. Do you recommend most of your clients have just a will, or do you suggest a will and a living revocable trust? A living revocable trust is such an important document that I would be wary about any planner who doesn't think it is useful.

5. Do you recommend using a home equity loan or line of credit to pay off credit card debt? A responsible planner will say no to this. When you borrow against the equity you have in your home, the home becomes the collateral for the loan. Miss too many payments, and you run the risk of losing the home. Your credit card debt, on the other hand, is what is known as unsecured debt: There is no collateral that the card company can take if you fall behind on your payments. It therefore makes no sense to put your house on the line to pay off a debt that is unsecured.

We are highlighting number 5 - because even if you are not hiring a financial planner this is excellent advice. This was strongly recommended for years - trade your unsecured debt for secured debt. Good for the lender, looks good for you since your payments and interests are usually significantly lower, but not necessarily good for you. Maybe now you have no credit card debt - but you still have the debt. The article is chock full of more good advice.

No comments: